10-Q 1 pdm103a.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended June 30, 2001 Commission file number 0-18166 STATE FINANCIAL SERVICES CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) WISCONSIN 39-1489983 --------- ---------- (State or other jurisdiction of (I.R.S. Employer identification No.) incorporation or organization) 10708 WEST JANESVILLE ROAD, HALES CORNERS, WISCONSIN 53130 ---------------------------------------------------------- (Address and Zip Code of principal executive offices) Not applicable -------------- (Former name, former address and former fiscal year, if changed since last report) (414) 425-1600 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_ No APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of June 30, 2001, there were 7,797,688 shares of Registrant's $0.10 Par Value Common Stock outstanding. FORM 10-Q STATE FINANCIAL SERVICES CORPORATION INDEX PART I - FINANCIAL INFORMATION Page No. Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets as of June 30, 2001 and December 31, 2000 2 Consolidated Statements of Income for the Three Months ended June 30, 2001 and 2000 3 Consolidated Statements of Income for the Six Months ended June 30, 2001 and 2000 4 Consolidated Statements of Cash Flows for the Six Months ended June 30, 2001 and 2000 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II - OTHER INFORMATION Items 1-6 16 Signatures 18 1 Part I. Financial Information Item 1. Financial Statements STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES Consolidated Statements of Condition (Unaudited)
June 30, December 31, 2001 2000 --------------------- --------------------- ASSETS Cash and due from banks $ 28,333,254 $ 44,993,586 Interest-earning deposits 34,119,375 3,303,170 Federal funds sold 9,568,954 1,760,272 --------------------- --------------------- Cash and cash equivalents 72,021,583 50,057,028 Investment securities Held-to-maturity (fair value $2,265,792 - June 30, 2001 and $3,015,242 - December 31, 2000) 2,272,982 2,973,224 Available for sale (at fair value) 273,586,393 300,668,224 Loans (net of allowance for loan losses of $7,540,687 - June 30, 2001 and $7,149,147 -December 31, 2000) 668,936,201 654,837,747 Loans held for sale 18,004,653 6,071,482 Premises and equipment 26,728,477 24,885,632 Accrued interest receivable 6,187,155 6,978,744 Goodwill 25,760,756 26,787,184 Other assets 5,944,694 7,527,086 --------------------- --------------------- TOTAL ASSETS $ 1,099,442,894 $ 1,080,786,351 ===================== ===================== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Demand 120,690,667 134,788,576 Savings 203,715,006 210,740,973 Money market 204,773,797 206,484,681 Time deposits in excess of $100,000 75,825,374 69,772,101 Other time 248,235,742 237,569,457 --------------------- --------------------- TOTAL DEPOSITS 853,240,586 859,355,788 Notes payable 11,156,000 7,309,250 Securities sold under agreements to repurchase 21,746,456 11,419,510 Federal funds purchased 0 10,000,000 Federal Home Loan Bank advances 97,700,000 77,700,000 Accrued expenses and other liabilities 6,204,955 5,591,897 Accrued interest payable 2,828,084 2,910,649 --------------------- --------------------- TOTAL LIABILITIES 992,876,081 974,287,094 Stockholders' equity: Preferred stock, $1 par value; authorized--100,000 shares; issued and outstanding--none Common stock, $0.10 par value; authorized--25,000,000 shares; Issued and outstanding--10,107,728 shares 1,010,773 1,010,773 Capital surplus 95,027,591 95,027,591 Retained earnings 47,787,329 46,045,533 Accumulated other comprehensive income 1,584,697 888,394 Unearned shares held by ESOP (5,131,608) (5,131,608) Treasury Stock - 2,370,542 shares in 2001 and 2,115,540 shares in 2000 (33,711,969) (31,341,426) --------------------- --------------------- TOTAL STOCKHOLDERS' EQUITY 106,566,813 106,499,257 --------------------- --------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,099,442,894 $ 1,080,078,351 ===================== ===================== See notes to unaudited consolidated financial statements.
2 STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES Consolidated Statements of Income (Unaudited)
Three months ended June 30, 2001 2000 --------------------- --------------------- INTEREST INCOME: Loans, including fees $13,812,205 $14,737,251 Investment securities Taxable 3,687,620 3,995,706 Tax-exempt 495,747 484,218 Federal funds sold 165,855 198,405 --------------------- --------------------- TOTAL INTEREST INCOME 18,161,427 19,415,580 INTEREST EXPENSE: Deposits 7,511,301 7,733,325 Notes payable and other borrowings 1,613,475 2,535,924 --------------------- --------------------- TOTAL INTEREST EXPENSE 9,124,776 10,269,249 --------------------- --------------------- NET INTEREST INCOME 9,036,651 9,146,331 Provision for loan losses 270,000 202,500 --------------------- --------------------- NET INTEREST INCOME AFTER 8,766,651 8,943,831 PROVISION FOR LOAN LOSSES OTHER INCOME: Service charges on deposit accounts 458,463 515,547 ATM and merchant service fees 769,521 626,562 Security commissions and management fees 254,396 318,556 Investment securities gains (losses) 1,164,687 (2,000) Gains on sale of loans 484,252 196,410 Other 386,211 365,264 --------------------- --------------------- TOTAL OTHER INCOME 3,517,530 2,020,339 OTHER EXPENSES: Salaries and employee benefits 4,047,058 3,695,551 Net occupancy expense 551,819 495,165 Equipment rentals, depreciation and maintenance 971,067 1,002,672 Data processing 454,001 495,414 Legal and professional 465,115 387,796 ATM and merchant services 535,375 425,278 Advertising 316,125 285,224 Goodwill amortization 513,263 513,264 Other 1,280,746 1,191,785 --------------------- --------------------- TOTAL OTHER EXPENSES 9,134,569 8,492,149 INCOME BEFORE INCOME TAXES 3,149,612 2,472,021 Income taxes expense 1,335,341 968,732 --------------------- --------------------- NET INCOME $1,814,271 $ 1,503,289 ===================== ===================== Basic earnings per common share $ 0.24 $ 0.19 Diluted earnings per common share 0.24 0.19 Dividends per common share 0.12 0.12 See notes to unaudited consolidated financial statements.
3 STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES Consolidated Statements of Income (Unaudited)
Six months ended June 30, 2001 2000 --------------------- --------------------- INTEREST INCOME: Loans, including fees $27,947,831 $30,252,469 Investment securities Taxable 8,008,882 7,257,129 Tax-exempt 979,520 946,491 Federal funds sold 218,011 339,081 --------------------- --------------------- TOTAL INTEREST INCOME 37,154,244 38,795,170 INTEREST EXPENSE: Deposits 15,499,545 15,197,070 Notes payable and other borrowings 3,509,729 4,734,545 --------------------- --------------------- TOTAL INTEREST EXPENSE 19,009,274 19,931,615 --------------------- --------------------- NET INTEREST INCOME 18,144,970 18,863,555 Provision for loan losses 540,000 405,000 --------------------- --------------------- NET INTEREST INCOME AFTER 17,604,970 18,458,555 PROVISION FOR LOAN LOSSES OTHER INCOME: Service charges on deposit accounts 908,765 981,827 ATM and merchant service fees 1,497,476 1,201,868 Security commissions and management fees 511,147 681,242 Investment securities gains (losses) 1,595,811 (2,000) Gains on sale of loans 865,255 341,628 Other 739,608 692,440 --------------------- --------------------- TOTAL OTHER INCOME 6,118,062 3,897,005 OTHER EXPENSES: Salaries and employee benefits 8,015,542 7,434,928 Net occupancy expense 1,120,643 1,026,016 Equipment rentals, depreciation and maintenance 1,877,363 2,002,491 Data processing 999,407 1,017,277 Legal and professional 914,169 885,660 ATM and merchant services 1,050,880 818,569 Advertising 575,457 561,864 Goodwill amortization 1,026,528 1,026,526 Other 2,237,782 2,285,635 --------------------- --------------------- TOTAL OTHER EXPENSES 17,817,771 17,058,966 INCOME BEFORE INCOME TAXES 5,905,261 5,296,594 Income taxes expense 2,358,801 2,087,669 --------------------- --------------------- NET INCOME $3,546,460 $ 3,208,925 ===================== ===================== Basic earnings per common share $ 0.47 $ 0.40 Diluted earnings per common share 0.47 0.40 Dividends per common share 0.24 0.24 See notes to unaudited consolidated financial statements.
4 STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited)
Six months ended June 30, 2001 2000 -------------------- ------------------- OPERATING ACTIVITIES Net income $3,546,460 $3,208,925 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 540,000 405,000 Provision for depreciation 1,331,885 1,307,006 Amortization of investment security premiums and accretion of discounts-net 418,892 7,433 Amortization of goodwill 1,026,528 1,026,526 Deferred income taxes 1,514,466 0 Decrease (increase) in accrued interest receivable 791,589 (346,176) Increase (decrease) in accrued interest payable (82,565) 183,216 Realized investment securities gains, net (1,595,811) 2,000 Other (1,569,022) 2,012,935 -------------------- ------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 5,922,422 7,806,865 INVESTING ACTIVITIES Proceeds from maturities or principal payments of investment securities held-to-maturity 693,253 235,655 Purchases of securities available for sale (120,698,234) (60,976,228) Proceeds from maturities and sales of investment securities available for sale 151,910,182 15,078,675 Net (increase) decrease in loans (26,571,625) 21,528,551 Net purchases of premises and equipment (3,174,730) (3,023,165) -------------------- ------------------- NET CASH USED PROVIDED BY INVESTING ACTIVITIES 2,158,846 (27,156,512) FINANCING ACTIVITIES Net decrease in deposits (6,115,202) (12,052,722) Proceeds of notes payable 3,846,750 3,385,999 Net change in securities sold under agreement to repurchase 10,326,946 10,117,306 Increase in Federal Home Loan Bank advances 20,000,000 13,200,000 Cash dividends (1,804,665) (1,937,133) Repayments of federal funds purchased (10,000,000) (4,875,000) Purchase of Treasury Stock (2,370,542) (2,855,244) Proceeds from exercise of stock options 0 82,992 -------------------- ------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 13,883,287 5,066,198 -------------------- ------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 21,964,555 (14,283,449) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 50,057,028 59,784,033 -------------------- ------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 72,021,583 $ 45,500,584 ==================== =================== Supplemental information: Cash paid for Interest $ 19,093,836 $ 22,493,399 Cash paid for Income taxes 1,103,522 1,279,121 See notes to unaudited consolidated financial statements.
5 STATE FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements June 30, 2001 NOTE A--BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements include the accounts of State Financial Services Corporation (the "Company" or "State") and its subsidiaries. All significant intercompany balances and transactions have been eliminated. The unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Interim operating results are not necessarily indicative of the results that may be expected for the year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. NOTE B--ACCOUNTING CHANGES Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," and SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities and Deferral of the Effective Date of SFAS No. 133," which defers the effective date of SFAS No. 133 until years beginning after June 15, 2000, provide a comprehensive and consistent standard for the recognition and measurement of derivatives and hedging activities. SFAS No. 133 requires all derivatives to be recorded on the balance sheet at fair value. However, the Statement provides for special accounting for certain derivatives that meet the definition of hedges. Changes in the fair value of derivatives that do not meet the definition of hedges are required to be reported in earnings in the period of the change. The Company does not use derivative financial instruments such as futures, swaps, caps, floors, options, interest or principle, only strips of similar financial instruments. Therefore, the Statement does not have an impact on the Company. The Company implemented SFAS No. 133 on January 1, 2001, and there was no transition adjustment. SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinquishments of Liabilities", which was issued in September 2000, replaces, in its entirety, SFAS No. 125. Although SFAS No. 140 has changed many of the rules regarding securitizations, it continues to require an entity to recognize the financial and servicing assets it controls and the liabilities it has incurred and to derecognize financial assets when control has been surrendered in accordance with the criteria provided in the Statement. As required, the Company has applied the new rules prospectively to transactions beginning in the second quarter of 2001. The application of the new rules did not have a material impact on the Company's financial statements. 6 NOTE C--EARNINGS PER SHARE Basic earnings per share is computed by dividing net income by the weighted-average common shares outstanding less unearned ESOP shares. Diluted earnings per share is computed by dividing net income by the weighted-average common shares outstanding less unallocated ESOP shares plus the assumed conversion of all potentially dilutive securities. The denominators for the earnings per share amounts are as follows:
For the three months ended For the six months ended June 30, June 30, June 30, June 30, 2001 2000 2001 2000 ------------------------------------------------------------------- Basic: Weighted-average number of shares outstanding 7,816,815 8,411,435 7,893,228 8,496,610 Less: weighted-average number of unearned ESOP shares (375,500) (375,500) (375,500) (391,458) ------------------------------------------------------------------- Denominator for basic earnings per share 7,441,315 8,035,935 7,517,728 8,105,152 =================================================================== Fully diluted: Denominator for basic earnings per share 7,441,315 8,035,935 7,517,728 8,105,152 Add: assumed conversion of stock options using treasury stock method 3,809 5,001 3,315 5,948 ------------------------------------------------------------------- Denominator for fully diluted earnings per share 7,445,124 8,040,936 7,521,043 8,111,100 ===================================================================
NOTE D - COMPREHENSIVE INCOME Comprehensive income is the total of reported net income and all other revenues, expenses, gains and losses that under generally accepted accounting principles are not includable in reported net income but are reflected in shareholders equity.
For the three months ended For the six months ended June 30, June 30, June 30, June 30, 2001 2000 2001 2000 ------------------------------------------------------------------- Net Income $1,814,271 $1,503,289 $3,546,460 $3,208,925 Other comprehensive income (loss) Change in unrealized securities gains (losses), net of tax (524,187) (247,474) 1,666,397 (758,392 Reclassification adjustment for realized (gains) losses included in net income (1,164,687) 2,000 (1,595,811) 2,000 Estimated income tax expense on realized securities gains 456,674 (784) 625,717 (784) -------------------------------------------------------------------- Total comprehensive income $582,071 $1,257,031 $4,242,763 $2,451,749 ====================================================================
NOTE E - STOCK REPURCHASE PROGRAM On March 8, 2000, the Company's Board of Directors authorized the repurchase of approximately 600,000 shares of the Company's Common Stock (the "2000 Repurchase Program"). The Company completed the 2000 Repurchase Program on September 13, 2000, repurchasing a total of 600,400 shares at an average price of $10.17. 7 On March 12, 2001, the Company's Board of Directors authorized the repurchase of up to 5%, or approximately 450,000 shares of the Company's Common Stock (the "2001 Repurchase Program"). As of June 30, 2001 the Company purchased 194,500 shares at an average price of $12.19. NOTE F - SUBSEQUENT EVENT On July 7, 2001, State completed its cash acquisition of Milwaukee-based LB Bancorp, Inc. and its wholly-owned $93 million Liberty Bank. Liberty Bank and its five locations have been merged into State Financial Bank, N.A. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Changes in Financial Condition At June 30, 2001 and June 30, 2000 total assets were $1.1 billion. At June 30, 2001, total deposits decreased $6.1 million compared to December 31, 2000 mainly due to cyclical declines in demand balances and lower savings and money market balances influenced by intense competition from non-depository investment options. Other uses of funds during the first half of 2001 consisted of a $26.6 million net increase in loans, $31.9 million increase in investment securities, $10 million repayment of Federal Funds purchased, $2.4 million for the purchase of treasury stock, $1.8 million payment of cash dividends, and $3.2 million for fixed assets. The purchase of fixed assets was mainly due to construction in progress incurred for an additional office in Elgin, which opened June, 2001. Funding sources came from a $20 million increase in Federal Home Loan Bank Advances, $10.3 million increase in securities sold under agreements to repurchase, $5.9 million in net cash provided by operating activities, $22.0 million increase in cash and cash equivalents, and $3.8 million increase in notes payable. Asset Quality At June 30, 2001, non-performing assets were $10.3 million, an increase of $1.2 million from December 31, 2000 due to an increase of $1.1 million in nonaccrual loans. Total non-performing assets as a percentage of total assets were 0.94% at June 30, 2001 and 0.84% at December 31, 2000. As a percentage of total loans outstanding, the level of non-performing loans increased to 1.42% at June 30, 2001 from 1.32% at December 31, 2000. The following table summarizes non-performing assets on the dates indicated (dollars in thousands).
Jun. 30 Mar. 31 Dec. 31 Sep. 30 Jun. 30 2001 2001 2000 2000 2000 -------------- -------------- --------------- -------------- -------------- Nonaccrual loans $9,887 $9,382 $8,729 $5,160 $4,780 Accruing loans past due 90 days or more 0 0 106 250 22 Restructured loans 0 0 0 0 0 -------------- -------------- --------------- -------------- -------------- Total non-performing and restructured loans 9,887 9,382 8,835 5,410 4,802 Other real estate owned 433 262 267 276 223 -------------- -------------- --------------- -------------- -------------- Total non-performing assets $10,320 $9,644 $9,102 $5,686 $5,025 ============== ============== =============== ============== ============== Ratios: Non-performing loans to total loans 1.42% 1.37% 1.32% 0.74% 0.66% Allowance to total loans 1.09 1.08 1.07 0.97 0.99 Allowance to non-performing loans 76.27 78.83 80.92 130.54 149.25 Non-performing assets to total assets 0.94 0.89 0.84 0.52 0.46 ============== ============== =============== ============== ==============
8 When, in the opinion of management, serious doubt exists as to the collectibility of a loan, the loan is placed on non-accrual status. At the time a loan is classified as non-accrual, interest income accrued in the current year is reversed and interest income accrued in the prior year is charged to the allowance for loan losses. Allowance for Loan Losses and Net Charge-offs Management maintains the allowance for loan losses (the "Allowance") at a level considered adequate to provide for probable loan losses. The Allowance is increased by provisions charged to earnings and is reduced by charge-offs, net of recoveries. At June 30, 2001, the Allowance was $7.5 million, an increase of $392 thousand from the balance at December 31, 2000. The adequacy of the Allowance is determined quarterly based upon an evaluation of the Company's loan portfolio by the internal loan review officer and management. These evaluations consider a variety of factors, including, but not limited to, general economic conditions, loan portfolio size and composition, previous loss experience, the borrower's financial condition, collateral adequacy, the level of non-performing loans, and management's estimation of future losses. As a percentage of loans, the Allowance was 1.09% at June 30, 2001 compared to 1.07% at December 31, 2000. Based upon its analyses, management considers the Allowance adequate to recognize the risk inherent in the Company's loan portfolio at June 30, 2001. The following table sets forth an analysis of the Company's Allowance for loan losses for the periods indicated (dollars in thousands):
Six months Ended Year ended June 30, 2001 Dec. 31, 2000 ------------------------------------------ Balance at beginning of period $7,149 $6,905 Charge-offs: Commercial 72 464 Real estate 44 74 Installment 129 255 Other 4 40 ------------------------------------------ Total charge-offs 249 833 Recoveries: Commercial 15 96 Real estate 1 4 Installment 81 160 Other 4 7 ------------------------------------------ Total recoveries 101 267 ------------------------------------------ Net charge-offs 148 566 Additions charged to operations 540 810 ------------------------------------------ Balance at end of period $7,541 $7,149 ========================================== Ratios: Net charge-offs to average loans outstanding1 0.02% 0.08% Net charge-offs to total allowance1 1.96 7.92 Allowance to period end loans outstanding 1.09 1.07 -----------------------------------------------------========================================== 1. Annualized
9 Results of Operations - Comparison of the Three Months Ended June 30, 2001 and 2000 General For the quarter ended June 30, 2001, the Company reported a net income of $1.8 million, compared to net income of $1.5 million reported for the quarter ended June 30, 2000. Net Interest Income The following table sets forth average balances, related interest income and expenses, and effective interest yields and rates for the three months ended June 30, 2001 and June 30, 2000 (dollars in thousands):
2001 2000 --------------------------------------------------------------------------------- Average Yield/ Average Yield/ Balance Interest Rate4 Balance Interest Rate4 --------------------------------------------------------------------------------- ASSETS Interest-earning assets: Loans123 $689,461 $ 13,843 8.08% $725,530 $ 14,769 8.19% Taxable investment securities 236,476 3,550 6.04% 226,721 3,881 6.88% Tax-exempt investment securities3 44,365 751 6.81% 41,639 734 7.09% Other short-term investments 0 0 0.00% 2,283 38 6.69% Interest-earning deposits 10,382 138 5.35% 5,182 77 5.98% Federal funds sold 15,955 165 4.18% 13,585 198 5.86% --------------------------------------------------------------------------------- Total interest-earning assets 996,639 18,447 7.44% 1,014,940 19,697 7.81% Non-interest-earning assets: Cash and due from banks 34,542 31,777 Premises and equipment, net 26,116 24,415 Other assets 38,260 42,481 Less: Allowance for loan losses (7,473) (7,134) --------------- -------------- TOTAL $1,088,084 $1,106,479 =============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Now accounts $ 88,202 $ 314 1.43% $106,556 $ 453 1.68% Money market accounts 196,142 1,823 3.74% 190,318 2,294 4.85% Savings deposits 120,164 678 2.72% 141,323 953 2.71% Time deposits 321,177 4,696 5.88% 288,227 4,034 5.63% Notes payable 9,776 160 6.58% 43,437 771 7.14% FHLB borrowings 97,700 1,208 4.97% 86,071 1,327 6.20% Federal funds purchased 467 7 6.03% 14,821 261 7.08% Securities sold under agreement to repurchase 19,542 239 4.92% 10,502 176 6.74% --------------------------------------------------------------------------------- Total interest-bearing liabilities 853,170 9,125 4.30% 881,255 10,269 4.69% Non-interest-bearing liabilities: Demand deposits 118,345 111,745 Other 9,127 4,544 --------------- -------------- Total liabilities 980,642 997,544 --------------- -------------- Stockholders' equity 107,442 108,935 --------------- -------------- TOTAL $1,088,084 $1,106,479 =============== ============== Net interest earning and interest rate spread $ 9,322 3.14% $ 9,428 3.12% ======================== ======================== Net yield on interest-earning assets 3.75% 3.74% ============== ============= ------------------ 1 For the purposes of these computations, non-accrual loans are included in the daily average loan amounts outstanding. 2 Interest earned on loans includes loan fees (which are not material in amount) and interest income which has been received from borrowers whose loans were removed from non-accrual during the period indicated. 3 Taxable-equivalent adjustments are made in calculating interest income and yields using a 34% rate for all years presented. 4 Annualized
10 For the quarter ended June 30, 2001, the Company reported taxable-equivalent net interest income of $9.3 million, a decrease of $100 thousand or 1.1% from the $9.4 million reported for the quarter ended June 30, 2000. The decrease was mainly due to the decline in rates on interest earning assets. The Company's taxable-equivalent net interest margin increased to 3.75% in the second quarter 2001 from 3.74% in the second quarter 2000. Taxable-equivalent total interest income decreased $1.2 million for the quarter ended June 30, 2001 compared to the second quarter of 2000 mainly due to rate and volume decreases in interest-earning assets over the preceding twelve months. The Company reported a $18.3 million or 1.8% decrease in the volume of average interest-earning assets in second quarter 2001 over second quarter 2000, mainly due to decreased average loans offset by increased investment securities. Average loans outstanding decreased $36 million or 5.0% in second quarter 2001 over second quarter 2000. The decrease was mainly due to the sale of $67.8 million of long-term fixed-rate mortgages during the fourth quarter 2000, which were replaced with adjustable rate mortgage investment securities. This is the main reason for the increase of $9.8 million in taxable investment securities. For the quarter ended June 30, 2001, the Company's taxable-equivalent yield on interest-earning assets was 7.44% compared to 7.81% for the quarter ended June 30, 2000. The Company's second quarter 2001 loan yield decreased to 8.08% from 8.19% in second quarter 2000, mainly due to customers refinancing to lower interest rates in 2001. The Company also experienced yield declines in its taxable investment securities due to the maturities, calls, and paydowns of higher rate securities being reinvested into a lower rate environment. For the quarter ended June 30, 2001, the yield on taxable investment securities decreased to 6.04% from 6.88% and tax-exempt investment yields decreased to 6.81% from 7.09% for the quarter ended June 30, 2000. Funding costs were also impacted by the lower interest rate environment prevalent over the first six months of 2001. The cost of interest-bearing liabilities decreased to 4.30% for second quarter 2001 from 4.69% for second quarter 2000 mainly due to the lower rate environment and a reduced percentage of interest-bearing liabilities in wholesale borrowings. In the second quarter 2001, FHLB borrowings, federal funds purchased, and securities sold under agreements to repurchase comprised 14.9% of the Company's interest-bearing liabilities compared to 17.6% in second quarter 2000. The company was able to reduce the amount of wholesale borrowings that is needed to support asset growth. Provision for Loan Losses The provision for loan losses was $270 thousand in second quarter 2001 and $202.5 thousand in second quarter 2000. Other Income Total other income increased $1.5 million in second quarter 2001 over second quarter 2000, mainly due to an increases in investment securities gains, ATM and merchant services, gains on sale of loans, and other income. These increases were offset by decreases in service charges on deposit accounts and security commissions and management fees. The Company realized $1.2 million in investment securities gains due to the sale of approximately $93 million in mortgage backed securities. ATM fees and merchant services income increased $143 thousand, due to increased volume of foreign transactions at the Company's ATM terminals and merchant services income increased due to increased volume and rate adjustments. Gains on sale of mortgage loans increased $288 thousand due to increased volume resulting from a lower rate environment. Security transaction commissions and management fees decreased $64 thousand due to decreased volume. Other Expenses Other expenses increased $642 thousand in second quarter 2001 over second quarter 2000, due to increases in personnel expenses, occupancy and equipment expenses, legal and professional fees, ATM and merchant services, advertising, and other expenses, offset by a decrease in data processing. Personnel costs increased $352 thousand mainly due to increased sales commissions as a result of volume increases in the secondary mortgage market. ATM and merchant services increased $110 thousand due to customer volume increases and rate adjustments. Advertising increased $31 thousand and other expenses increased $89 thousand. Data processing decreased $41 thousand. 11 Income Taxes Income tax expense for the quarter ended June 30, 2001 was $1.3 million compared to expense of $969 thousand for the quarter ended June 30, 2000 due to a 27.4% increase in income before income taxes. Results of Operations - Comparison of the Six Months Ended June 30, 2001 and 2000 General For the six months ended June 30, 2001, the Company reported a net income of $3.5 million compared to net income of $3.2 million reported for the six months ended June 30, 2000. 12 Net Interest Income The following table sets forth average balances, related interest income and expenses, and effective interest yields and rates for the six months ended June 30, 2001 and June 30, 2000 (dollars in thousands):
2001 2000 --------------------------------------------------------------------------------- Average Yield/ Average Yield/ Balance Interest Rate4 Balance Interest Rate4 --------------------------------------------------------------------------------- ASSETS Interest-earning assets: Loans123 $682,454 $ 28,009 8.28% $735,449 $ 30,316 8.29% Taxable investment securities 246,529 7,804 6.38% 208,370 7,014 6.77% Tax-exempt investment securities3 43,600 1,484 6.86% 40,829 1,434 7.06% Other short-term investments 0 0 0.00% 1,141 38 6.70% Interest-earning deposits 8,558 205 4.82% 7,423 205 5.55% Federal funds sold 9,757 218 4.51% 11,748 339 5.80% --------------------------------------------------------------------------------- Total interest-earning assets 990,898 37,720 7.68% 1,004,960 39,346 7.87% Non-interest-earning assets: Cash and due from banks 36,302 32,700 Premises and equipment, net 25,669 24,166 Other assets 39,470 41,884 Less: Allowance for loan losses (7,367) (7,084) --------------- -------------- TOTAL $1,084,972 $1,096,626 =============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: Now accounts $ 88,377 $ 631 1.44% $105,989 $ 898 1.70% Money market accounts 196,102 4,074 4.19% 183,729 4,329 4.74% Savings deposits 119,180 1,384 2.34% 143,504 1,940 2.72% Time deposits 317,715 9,411 5.97% 292,144 8,030 5.53% Notes payable 8,708 313 7.25% 43,969 1,568 7.17% FHLB borrowings 96,071 2,538 5.33% 78,803 2,351 6.00% Federal funds purchased 4,603 144 6.31% 14,355 475 6.65% Securities sold under agreement to repurchase 18,459 514 5.62% 11,900 341 5.76% --------------------------------------------------------------------------------- Total interest-bearing liabilities 849,215 19,009 4.51% 874,393 19,932 4.58% Non-interest-bearing liabilities: Demand deposits 117,754 110,181 Other 9,175 3,677 --------------- -------------- Total liabilities 976,144 988,251 --------------- -------------- Stockholders' equity 108,828 108,375 --------------- -------------- TOTAL $1,084,972 $1,096,626 =============== ============== Net interest earning and interest rate spread $ 18,711 3.17% $ 19,414 3.29% ========================= ========================= Net yield on interest-earning assets 3.81% 3.88% ============== ============= ------------------- 1 For the purposes of these computations, non-accrual loans are included in the daily average loan amounts outstanding. 2 Interest earned on loans includes loan fees (which are not material in amount) and interest income which has been received from borrowers whose loans were removed from non-accrual during the period indicated. 3 Taxable-equivalent adjustments are made in calculating interest income and yields using a 34% rate for all years presented. 4 Annualized
13 For the six months ended June 30, 2001, the Company reported taxable-equivalent net interest income of $18.7 million, a decrease of $702 thousand or 3.6% from the $19.4 million reported for the six months ended June 30, 2000. The decrease was mainly due to the decline in rates on interest earning assets. The Company's taxable-equivalent net interest margin declined to 3.81% in the first half of 2001 from 3.88% in first half of 2000. Taxable-equivalent total interest income decreased $1.6 million for the six months ended June 30, 2001 compared to the first six months of 2000. The decrease was mainly due to volume decreases in interest-earning assets over the preceding twelve months. The Company reported a $14.1 million or 1.4% decrease in the volume of average interest-earning assets in the first half of 2001 over the first half of 2000, mainly due to decreased average loans offset by increased investment securities. Average loans outstanding decreased $53 million or 7.2% in the first half of 2001 over the first half of 2000. The decrease was mainly due to the sale of $67.8 million of long-term fixed-rate mortgages during 2000, which were replaced with adjustable rate mortgage investment securities. This is the main reason for the increase of $38.2 million in taxable investment securities. For the six months ended June 30, 2001, the Company's taxable-equivalent yield on interest-earning assets was 7.68% compared to 7.87% for the six months ended June 30, 2000. The Company's loan yield decreased to 8.28% from 8.29% in the first six months of 2001 compared to the first six months of 2000. The Company also experienced yield declines in its taxable investment securities due to the maturities, calls, and paydowns of higher rate securities being reinvested into a lower rate environment. For the six months ended June 30, 2001, the yield on taxable investment securities decreased to 6.38% from 6.77% and tax-exempt investment yields decreased to 6.86% from 7.06% for the quarter ended June 30, 2000. Funding costs were also impacted by the lower interest rate environment prevalent over the first six months of 2001. The cost of interest-bearing liabilities decreased to 4.51% for the first half of 2001 from 4.58% for the first half of 2000 mainly due to the lower rate environment, a lower percentage of interest-bearing liabilities in wholesale borrowings. In the first half of 2001, FHLB borrowings, federal funds purchased, and securities sold under agreements to repurchase comprised 15.1% of the Company's interest-bearing liabilities compared to 17.0% in the first half of 2000. The company was able to reduce the amount of wholesale borrowings needed to support asset growth. Provision for Loan Losses The provision for loan losses was $540 thousand in the first half of 2001 and $405 thousand in the first half of 2000. Other Income Total other income increased $2.2 million in the first half of 2001 over the first half of 2000, mainly due to increases in ATM and merchant services, gains on sale of loans, realized gains on investment securities, and other income. These increases were offset by decreases in service charges on deposit accounts and security commissions and management fees. ATM fees and merchant services income increased $296 thousand, due to increased volume in foreign transactions at the Company's ATM terminals and merchant services income increased due to increased volume and rate adjustments. Gains on sale of mortgage loans increased $524 thousand due to increased volume resulting from a lower rate environment. The Company realized $1.6 million in investment securities gains in the first half of 2001 compared to $2 thousand loss in the first half of 2000. Service charges on deposit accounts decreased $73 thousand and Security transaction commissions and management fees decreased $170 thousand due to decreased volume. Other Expenses Other expenses increased $759 thousand in the first half of 2001 over the first half of 2000, due to increases in personnel related expenses, legal and professional fees, ATM and merchant services, and advertising offset by decreases in occupancy and equipment expenses, data processing, and other expenses. Personnel costs increased $581 thousand mainly due to increased sales commissions as a result of volume increases in the secondary mortgage market. ATM and merchant services increased $232 thousand due to customer volume increases and rate adjustments. 14 Income Taxes Income tax expense for the six months ended June 30, 2001 was $2.4 million compared to expense of $2.1 million for the six months ended June 30, 2000. The effective tax expense was 39.9% for the first half of 2001 compared to a rate of 39.4% for the first half of 2000. Liquidity Liquidity management involves the ability to meet the cash flow requirements of customers who may be either depositors wanting to withdraw funds or borrowers needing assurance that sufficient funds will be available to meet their credit needs. Liquid assets (including cash deposits with banks, short-term investments, interest-earning deposits, and federal funds sold) are maintained to meet customers needs. The Company had liquid assets of $72 million and $50 million at June 30, 2001 and December 31, 2000, respectively. Capital Resources There are certain regulatory constraints which affect the Company's level of capital. The following table sets forth these requirements and the Company's capital levels and ratios at June 30, 2001, including the Tier 1 leverage ratio, the risk-based capital ratios based upon Tier 1 capital, and total risk-based capital:
Regulatory Regulatory Minimum Well-capitalized Actual Requirement Requirement ------ ----------- ----------- (dollars in thousands) Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- Tier 1 leverage $78,161 7.4% $42,454 4.0% $53,068 5.0% Tier 1 risk-based capital $78,161 11.7% $26,616 4.0% $39,924 6.0% Risk-based capital $85,702 12.9% $53,233 8.0% $66,541 10.0%
The Company is pursuing a policy of continued asset growth, which requires the maintenance of appropriate ratios of capital to assets. The existing capital levels allow for additional asset growth without further capital injection. It is the Company's desire to maintain its capital position at or in excess of the "well-capitalized" definition. The Company seeks to obtain additional capital growth through earnings retention and a conservative dividend policy. Item 3. Quantitative and Qualitative Disclosures About Market Risk Refer to the Company's annual report on Form 10-K for the year ended December 31, 2000 for a complete discussion of the Company's market risk. There have been no material changes to the market risk information included in the Company's 2000 annual report on Form 10-K Forward Looking Statements The Company intends that certain matters discussed in this Report are "forward-looking statements" intended to qualify for the safe harbor from liability established by the private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such because the statements will include words such as "believes," anticipates, "expects, "or words of similar meaning. Similarly, statements that describe future plans, objectives, outlooks, targets or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of this Report. Factors that could cause such a variance include, but are not limited to, changes in interest rates, local market competition, customer loan and deposit preferences, regulation, and other general economic conditions. Shareholders, potential investors, and other readers are urged to consider these factors in evaluating the forward-looking statements and cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included in this Report are only made of the 15 date of this Report, and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. Part II. Other Information Item 1. Legal Proceedings As of June 30, 2001, the Company is involved in various pending legal proceedings consisting of ordinary routine litigation incidental to the business of the Company. None of these proceedings is considered material, either in part or in the aggregate, and are therefore not expected to have a material adverse impact on the Company's financial condition, results of operations, cash flows, and capital ratios. Item 2. Changes in Securities None Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to Vote of Security Holders Annual Meeting of Shareholders. On May 2, 2001, at the Annual Meeting of the shareholders of the Company, the Company's shareholders reelected Michael J. Falbo and Ulice Payne as directors for three year terms expiring on the date of the annual shareholders' meeting to be held in 2004. Shareholder Vote with Respect to Matters Acted Upon at the Annual Meeting Election of Directors. Under Wisconsin law, the number of persons corresponding to the number of director positions to be filled at the Annual Meeting who received the highest number of votes would be elected as directors. Michael J. Falbo and Ulice Payne were standing for reelection at the Annual Meeting. The vote with respect to the reelection of each was as follows: MICHAEL J. FALBO ---------------- 7,992,188 total votes were eligible to be cast. 7,590,133 votes were represented in person or by proxy at the Annual Meeting. 6,884,225 votes were cast "FOR" the reelection of Mr. Falbo -0- votes were cast "AGAINST" the reelection of Mr. Falbo 705,908 votes abstained or were broker non-votes. ULICE PAYNE ----------- 7,992,188 total votes were eligible to be cast. 7,590,133 votes were represented in person or by proxy at the Annual Meeting. 7,156,436 votes were cast "FOR" the reelection of Mr. Payne -0- votes were cast "AGAINST" the reelection of Mr. Payne 433,697 votes abstained or were broker non-votes. The other directors of the Company whose terms of office continued after the Annual Meeting include Jerome J. Holz, Richard A. Horn, Thomas S. Rakow, David M. Stamm and Barbara E. Weis. The Company's proxy materials for the Annual Meeting included a shareholder proposal pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as amended, requesting that the Board of Directors take steps to effect a sale or merger of the Company. The shareholder proponent failed to appear at the Annual Meeting to present the proposal as required by Rule 14a-8(h)(1). As a result, the shareholder proposal was not submitted to a vote of the Company's shareholders. 16 Item 5. Other Information The deadline for submission of shareholder proposals pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as amended, for inclusion in the Company's proxy statement for its 2002 Annual Meeting of Shareholders is November 23, 2001. Additionally, if the Company receives notice of a shareholder proposal after February 1, 2002, the persons named in proxies solicited by the Board of Directors of the Company for its 2002 Annual Meeting of Shareholders may exercise discretionary voting power with respect to such proposal. Item 6. Exhibits and Reports on Form 8-K On March 7, 2001, the Company filed a report on Form 8-K in regards to a definitive agreement and plan of merger to acquire LB Bancorp and its subsidiary, Liberty Bank. On July 10, 2001, the Company filed a report on Form 8-K in regards to the consummation of the Company's acquisition of LB Bancorp, Inc. and its subsidiary, Liberty Bank. 17 SIGNATURES Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. STATE FINANCIAL SERVICES CORPORATION (Registrant) Date: August 7, 2001 By /s/ Michael J. Falbo ----------------- --------------------------------- Michael J. Falbo President and Chief Executive Officer Date: August 7, 2001 By /s/ Timothy L. King ----------------- ------------------------------- Timothy L. King Senior Vice President, Chief Financial Officer, and Controller 18